Retirement savings and benefits are typically some of the largest marital assets to divide during divorce. There are many considerations to keep in mind relative to these benefits when negotiating how to structure your divorce settlement. We have highlighted a few key components of dividing retirement plans to consider.
Know the Types of Retirement Benefits
Retirement benefits can come in various forms, including employer-sponsored plans like 401(k)s and pension plans, as well as individual retirement accounts (IRAs). Each type has unique rules governing their division, which must be considered during divorce negotiations.
Review Financial Disclosures
During the divorce process, each spouse must disclose their financial information. It’s important to review this information in order to ensure all of the earned benefit details are included. Check for all of the retirement benefits earned during your marriage, noting that they may have been earned through more than one employer. If it seems as though some information may be missing, bring this to the attention of your attorney or the court.
Pension Valuation
Accurately valuing retirement benefits is essential for a fair division. The valuation process can be complex, especially for pension plans, which often require actuarial calculations to determine their present value. Working with a financial expert like a Certified Divorce Financial Analyst® can help ensure a precise valuation.
Learn more about pension valuations.
Qualified Domestic Relations Order (QDRO)
If benefits are to be divided by an employer, a divorce decree may not be enough to ensure payments are made to the divorcing spouse. An additional court order may be needed, which is called a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that outlines the specifics of the division, including how much each spouse will receive and the process for distribution. It’s important to work with legal and financial professionals who are experienced in drafting QDROs to ensure compliance with the plan’s rules and regulations.
Learn more about QDROs.
Tax Implications
When dividing retirement accounts, taxation must be taken into consideration. While certain retirement accounts offer tax advantages when contributions are made, withdrawals are generally subject to income tax. Dividing retirement benefits without careful consideration of tax consequences could result in unexpected financial burdens in the future.
Early Withdrawal Penalties
If retirement benefits are accessed before the account holder reaches the eligible age for penalty-free withdrawals (usually 59½), early withdrawal penalties may apply. During divorce negotiations, it’s important to know the rules for how to properly move money to avoid tax and penalty. There are also opportunities to take an early withdrawal from certain retirement accounts without penalty during divorce. Seek out help from a financial expert during divorce to ensure you know what options are available to you under different scenarios.
Once the divorce is final, very little can be done to claim your share of retirement benefits.
In the midst of the divorce process, the complexities of dividing retirement benefits can add stress to an already challenging situation. A Certified Divorce Financial Analyst® can help bring clarity to complicated financial considerations surrounding pensions and retirement benefits to ensure you aren’t overlooking important details. Our goal is to help you reach a settlement that aligns with your financial goals and provides a stable foundation for your financial future apart.
Contact us today to discuss your concerns regarding retirement benefits in divorce.
